359 Degrees: The Economy

First, note that I only claim up to 359 degrees of comprehension (if even that). I'm sure there's something I don't know.

All right. Let's start with the great depression, for history. Essentially, in a decade of economic growth, people developed a novel idea- investing "on margin." The thought was simple: you invest $100, and you can buy $1000 worth of stock. this was wonderful for most, for a time, because if your investment rose 10% (to a value of $1100) you didn't walk away with $110, you got $200! When stocks were going up, up, up, this was great. Many people made a lot of money. Then, the enevitable. Things slowed down. Stocks fell. And people were losing money they didn't have. Everyday people who invested $50 (a significant sum) were responsible for $450(an impossible sum). Some never even knew that this could happen at all, in a time of general ignorance about stocks. Still, corporations were treating leveraged capital like cash. The problem was, there was often no cash behind it. The average investor ended up bankrupt, but the truth was that there still wasn't any way to get the promised money. The rest is history.

In the last few years, the problem was a bit different, but also similar. With houses inflating everywhere, the hypothetical money in home equity was thought to be secure. In fact, investors were told that buying mortgages was a perfect investment. Even if the owner defaulted, the foreclosed house could still be sold, for instant cash. Take the money and buy the new owners mortgage, and you've got a perfect system.
This was true, until something crucial broke: reselling the homes. Due to unrelated economic factors (this is the part I admit ignorance to), demand for homes receded. If an owner declared bankruptcy, 250,000 in a house was just sitting there. the bank owned it, but now, they're not getting that 8% interest rate, and they can't shed the house. Banks that gladly paid cash for the "guaranteed" investment into less-than-qualified homeowners are not finding that the hypothetical money isn't worth dirt.
The Investors who put up the capital for this process find out that more and more of their money owns empty houses paying nothing rather than fat, juicy mortgages, and they pull out and take their money. The Investors decide that 100,000 in a foreclosed house is NOT as good (or better) than cash, and companies like Lehman Bros. find out that what they own doesn't cover what they borrowed to buy it, and when the creditors demand cash, they run out real quick. They promptly fold, and anyone still holding on to their devalued stock finds that their money, as well, isn't worth dirt.

This was one company. The Government doesn't want the great depression, but bigger, so they effectively agree to shoulder the burden of selling the houses, giving investors most, if not all of their "guaranteed" cash.

The hope is that when the houses start selling, the government will get its money back. If all of the sellable houses were to be sold for the prices of five years ago, the Government would actually make a lot of money, used to pay off the national debt.

Let's hope that happens!